Several prominent Malaysians were among those shown to have such offshore accounts.
Offshore tax havens are known to have been used by politicians, business people and the wealthy to hide assets worth hundreds of millions of dollars. And this raises a question: is there a difference between tax evasion and tax avoidance?
FMT spoke to tax specialist Veerinderjeet Singh to shed some light on these differences.
What is tax evasion?
According to Veerinderjeet, tax evasion refers to a situation where a person earns taxable income or earnings under the relevant tax legislation but fails to report his or her earnings whether knowingly or unknowingly.
He said this also includes situations where a person under-reports one’s earnings.
“If found guilty of breaking the relevant provisions of the law, then the person could be charged in court and be subjected to a fine or a jail sentence or both.
“However, in most circumstances, the person could voluntarily submit the relevant tax return form and report their income, submit relevant supporting documentation and pay the tax liability due plus the penalty that will be imposed for not complying with the law and submitting the tax return forms on time,” he said.
What is tax avoidance?
Tax avoidance refers to situations where a person uses the law effectively to minimise their tax liability – how much they owe – as the tax legislation may provide various incentives which include double deduction, special deductions and more.
Veerinderjeet said taking advantage of such provisions in the law was perfectly acceptable provided that one was eligible for specific incentives or deductions.
“However, if a person is not entitled or qualified for a special incentive or deduction and goes ahead to claim it, then that will be seen as tax evasion due to the under-reporting of actual taxable income,” he said.
Veerinderjeet also said another side of tax avoidance involved setting up transactions to flow through other entities outside the country after choosing the most tax-efficient country where an entity could be set up.
He noted that Malaysia has over 70 countries with which double taxation agreements have been set up to facilitate trade and impose lower taxes on the rich.
Is tax avoidance okay?
Veerinderjeet explained that there are two types of tax avoidance: taking advantage of existing incentives, and the manipulation of tax laws. The latter, he said, was not ethical.
“For example, if an existing company which has been in a business for some years decides to go into a specific manufacturing activity that is eligible for a tax incentive, it is perfectly legal for it to set up a new company to avoid taxes,” he said.
He said this should be fine as long as there was substance backing the claims.
Meanwhile, manipulating tax laws would be done by arranging the flow of income through a series of intermediary companies (flow-through entities) set up to take advantage of these low or zero withholding taxes in different countries. These intermediary companies have no staff or even an actual office.
What can be done to fix this?
Veerinderjeet said many countries have been taking steps to challenge these transactions if they are done primarily to take advantage of the tax benefits.
“Similarly, such measures can also be done within Malaysia and be challenged by the relevant tax legislation through anti-avoidance rules,” he said.
He added that one must be able to justify why a specific flow of transactions was relevant or why specific entities needed to be set up.
“If the objective of flow-through entities is to take advantage of tax benefits with no business or commercial rationale, the transaction can be challenged by the tax authorities under the Income Tax Act 1967 (Section 140).
“In which case, penalties will also be imposed for claiming or deducting a lower amount of taxes,” he said.